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Northrop sets 4Q charge
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January 6, 1999: 11:28 a.m. ET
$125M charge to cut '98 net by $1.18 a share; reduced 747 work cited
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NEW YORK (CNNfn) - Northrop Grumman stock is flying low Wednesday after its announcement that 1998 earnings would be cut by $1.18 a share due in large part to reduced deliveries of fuselages for Boeing 747s.
In Wednesday morning trading, the company's stock is down 5-5/8 to 67-5/8.
The Los Angeles-based aerospace company says the earnings reduction is a due to pretax charges of about $125 million to be taken in the fourth quarter, with $105 million tied to the reduced fuselage deliveries to Boeing.
The other $20 million is related to delays in an electronic warfare program called Directional Infrared Countermeasure, which is being developed in conjunction with the UK and U.S. governments.
First Call, which compiles analysts' earnings estimates, says the consensus forecast for Northrop Grumman's (NOC) 1998 earnings is $6.66 a share -- although that doesn't take the new charge into account. In 1997, the company earned $407 million, or $5.98 a diluted share, on sales of $9.2 billion.
Northrop Grumman also says the consensus earnings estimate of $7.51 a share for 1999 is about 15-20 percent too high. The company still expects 1999 sales to be above 1998 despite already announced cutbacks in commercial aircraft production that are expected to reduce sales by $350 million.
The Los Angeles-based aerospace giant is paying a price for the worldwide slump in aerospace orders that has plagued Boeing, one of its main sources of income, according to analyst Paul Nisbet of JSA Research Inc. in Newport, R.I.
"Obviously, as they go down to one fuselage a month from four or five, there are going to be lower levels of operating earnings and margins," Nisbet says. "It stands to reason that it's an inefficient rate of production."
The analyst says Northrop Grumman "may get some relief from Boeing at some point with regard to limits of low levels of production, but I would guess that's not the case."
As a result of the announcement, Nisbet is cutting his estimate on Northrop 1998 earnings to about $5.50 a share from the previous $6.65 a share. For 1999, Nisbet is reducing his earnings estimate to $6 a share from $7.50.
But Wednesday's sell-off only makes Northrop Grumman stock even more attractive to Nisbet, who continues to rate the stock a buy.
"It's a very, very undervalued stock," he says. "It's very unusual to see a stock trading at 11 times 1998 earnings. The (P-E ratio for the) rest of the stock market is in the low 20s."
Nisbet sees Northrop Grumman trading at $95 a share by the end of 2000 and $114 a share by the end of 2001.
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Northrop Grumman
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